The real choice that AstraZeneca faces

Since Pfizer revealed publicly its desire to take over AstraZeneca a fortnight ago, the future of Britain’s second-largest pharmaceutical company has been the subject of intense public scrutiny.

Politicians and policy makers have argued about the national interest, and the threat the takeover poses to the country’s scientific base. This week, MPs will have the chance to put their concerns to representatives of both companies when they appear before the House of Commons to answer questions about the bid.

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But this is not the only big question requiring discussion. Another is the extent to which the board of AstraZeneca – as it decides how to respond to the US group’s overtures – should be driven by the desires of its own shareholders.

One of the most troubling aspects of Pfizer’s bid is its lack of evident commercial logic. The choice of target and the form of consideration seem to be driven principally by the US group’s desire to re-domicile itself in the UK and shrug off certain burdensome American tax liabilities.

The deal will not obviously strengthen AstraZeneca in its pursuit of drug discoveries, or its ability to bring new life-saving compounds to market. Nor will it increase competition or sharpen innovation across the sector.

Pfizer’s dealmaking history is moreover a deeply dispiriting one. The group has a reputation for delivering returns to its investors not through creative management and groundbreaking research, but by the frequent execution of accountant-led, cost-crunching acquisitions.

Its financial record is questionable. Despite having spent some $240bn on three big acquisitions since 2000, its market capitalisation is just $185bn today. Meanwhile the Dow Jones index is more than 40 per cent higher.

AstraZeneca’s future as a business may not be the primary concern of shareholders who hope to sell their investment for a profit – especially those who have held their shares for a short time and are interested primarily in quick returns. But it should be in the minds of directors as they consider how to respond to Pfizer’s approach. While the UK group’s fate lies ultimately in the hands of its shareholders, the board has a critical role in influencing the outcome of any hostile bid.

The prevailing wisdom in the Anglo-Saxon world over the past 35 years has been that boards should simply respond to what they perceive their shareholders’ wishes to be. But this is incorrect.

Directors have wider responsibilities on which they should reflect before making any recommendation about a company’s future. Legally, their duties under the Companies Act are not simply to snap to attention when shareholders whistle. They are to advance the interest of the business as a whole over the long term.

This includes the interests of employees, relations with suppliers and customers and the impact of its operations on the wider community. These interests should not simply be set aside to secure the shareholders a short-term gain.

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These reflections are particularly pertinent in the case of AstraZeneca itself. The company would not have been built had its founders focused solely on quick returns. The business emerged from ICI’s pharmaceuticals division, which the UK chemicals group established after the second world war. This was unprofitable for two decades, until the discovery of antihypertensive drugs gave it a sustainable market position.

Research-based companies such as AstraZeneca depend on the commitment and motivation of their highly skilled workforces. Closing facilities and sacking people can only erode these ties.

There is a wider point about the way businesses should be run. The ideology of shareholder primacy has overemphasised the importance of near-term share price performance. This turns managers into what Professor John Kay has termed “meta fund managers”. They perceive their job to be about buying and selling assets.

But this is not the real role of a corporate executive. Rather, it is to run a business that adds value primarily by means of the goods and services it provides. Only if managers succeed at this endeavour will they generate returns to investors in the long term.

As AstraZeneca’s directors consider the approach from Pfizer, they should bear in mind this distinction. Their role is not just to sell some shares; it is to preserve the value of what has been created and to ensure that it continues to augment in future. If they cannot be sure of this outcome, they should not sell the company.